The ‘cost of living crisis’ will only affect one section of society: the poorest

One of the best quips to come out of Labour’s conference last week was from the delegate who observed: “The Tories have succeeded in making Britain like Venezuela without the need for Jeremy Corbyn.”

He had – a bit of – a point. An angry public is queuing for essentials – though not yet for food. Inflation is rising – though, so far, the Bank of England hasn’t had to issue a new currency. Poorer people in poorer places are hit disproportionately hard by regressive tax rises and cuts to universal credit, though we don’t yet have armed barrios. There is erosion of democratic norms (making it more difficult to vote) and political corruption (sale of peerages, dodgy NHS contracts). Although the UK is still some way short of “rogue state” status, we are certainly on the road to Caracas.

The Labour party and others are characterising the economic aspects of this worrying and unhealthy state of affairs as a “cost of living crisis”. It is certainly true that, in the coming months, price inflation will outstrip income inflation for many families, resulting in a fall in real incomes, especially after tax since national insurance is rising. For poor families this could inflict serious hardship; for them there is indeed a “crisis”, though this is primarily a consequence of unsympathetic, and even cruel, tax and benefit changes. But higher up the income scale there is every reason to treat the squeeze on real incomes as unavoidable, even as necessary.

First, the recovery from Covid-19 was bound to result in higher prices, as rapidly rising demand meets bottlenecks in supply. This is a global problem. Containers are in the wrong place; ports are congested; farmers can’t suddenly produce more food nor wells lots more oil and gas. Prices are bound to rise temporarily; that is how market economies work. In the past year, global commodity prices in dollar terms have risen 22 per cent; 27 per cent for food and 92 per cent for oil. Workers in shortage occupations are also getting pay rises, rightly.

Inevitably, the costs feed through into higher consumer prices. And attempts to suppress price increases (as has happened in the UK with price-capped heating prices) aggravates the supply problems. That isn’t to say that there aren’t some particularly British bits of incompetence, such as the closure of gas storage capacity or the government neglecting to notice tanker-driver shortages. But a spurt of inflation is a necessary concomitant of recovery and is being experienced from the UK, US and Germany to China, Russia and Brazil.

Second, if all the pious talk about “net zero” and “energy transitions” means anything, carbon-emitting energy simply has to become a lot more expensive. Sustained higher prices for motor fuel, domestic and industrial heating and air travel is the one guaranteed way to cut demand by forcing changes in behaviour. Of course, it is not sufficient; supply also needs to be cut in parallel by regulation or other disincentives to producers. But it is certainly necessary.

What is infuriating about many environmental activists – from the saintly Greta Thunberg to the people who block the motorways – is that they can’t see good news when it is staring them in the face. They should be out celebrating the current energy shock and praying for it to continue. The failure of political leadership on the climate crisis is not that politicians engage in “blah, blah, blah”, as Ms Thunberg put it. Rather, it is the propensity to run a mile when confronted by angry motorists faced with shortages and higher petrol prices or tourists denied what they see as their basic human right to low-cost flights to exotic locations.

A third point relates to the self-inflicted damage of Brexit. To say this is not to reopen the neuralgic issue of whether Brexit was right or wrong. My views on that are well known. But we are now encountering the practical consequences of a deliberate choice: introducing friction into our trade with the EU and erecting barriers at the border in place of free movement of labour. There was a reasonable argument for Brexit that the country should take a cut in its living standards in order to secure greater “freedom” or “control”. Surprise, surprise. That is what is happening. The UK was always free to be poorer if it chose to be.

In relation to labour markets, in particular, the argument was that Britain should move away from over-dependence on imported labour and move to higher-wage British labour (that indeed was the standpoint of the left-wing Brexiteers in the Labour party of whom Mr Corbyn was a closet supporter). It is interesting to see some of the leading right-wing Brexiteers also now arguing that market forces must drive wages up to resolve labour shortages for HGV drivers and other scarcity occupations.

I don’t recall similar enthusiasm a decade ago when Len McClusky’s tanker drivers were accused of “holding the country to ransom” when they went on strike demanding better pay and conditions. There is going to be a lot more of that as workers get organised to take advantage of scarcity in particular sectors. Somehow, I don’t expect to see Messrs Duncan Smith and Farage on the picket lines, as workers, quite understandably, seek to exploit the opportunity Brexit has given them.

The process of labour-market adjustment to Brexit could prove to be messy since it may require very big increases in pay to get British workers to fill the gaps which then feed through into higher prices and a cut in living standards for everyone else. The evidence which I saw during the Coalition suggested that immigration to the UK was overwhelmingly complementary rather than competitive, with little impact on pay. Stopping immigration and filling the gaps from the domestic workforce will be very expensive and inflationary.

The reassuring official response to the surge in inflation is “don’t worry” since the Bank of England has the tools to stop it by raising interest rates. We know, however, that increased interest rates will squeeze indebted families and companies. It is hoped that modest increases will be enough to bring inflation down quite quickly. But if workers were to regain some of the bargaining power which they used to have in the private sector we could get into a spiral of pay chasing prices. Then, the interest rate hike would have to be much bigger and more painful.

We may be getting into a world where inflation proves more stubborn than we hoped. Central banks will deal with it at a cost to indebted families and jobs in highly geared companies. Nonetheless, we are not heading for a generalised “cost of living crisis” since well-organised workers and professionals and inflation-proofed pensioners will be protected. It will be a crisis for one section of society: the poorest.

The people on the receiving end will be groups such as unpaid carers and working families dependent on precarious, low-paid jobs and who have little bargaining power; who are to be found on buses rather than in petrol queues; who live off costly credit cards; who pay for their heating through meters not accounts with energy companies; who are stranded in the wrong place and the wrong skill-set as furlough ends; and who rely on foodbanks to get by. These are the people who will be badly hurt by the loss of universal credit and higher national insurance contributions, both highly regressive measures which have been Mr Sunak’s favoured techniques for balancing the budget.

The real crisis in the UK today is not the “cost of living”, since most sections of society can stand some increase in prices and some are necessary or inevitable or both. Instead, the economic crisis is of poverty and inequality and the political crisis is the hegemony of a government which – for all its talk of “levelling up” – has no interest in solving either.